Government, Courts, and the World of Work

One of the suggestions contained in the Labor transition report submitted to Governor Christie is to delete the word “Labor” from the Department of Labor and Workforce Development because the “current name suggests a bias toward organized labor, and a change in the name will help the department more closely align with all stakeholders.”

The Governor wants to focus on job development and presumably the stakeholders to which the report is referring are employers.  But simply issuing an executive order changing the name of the department will not make it more employer-friendly or customer driven, if that’s the goal.

Whatever its name, the department was not legally created as a booster of trade and commerce.  Among other things, it was authorized to administer and enforce Federal and State wage, hour, health and safety laws.  And to no one’s surprise, these laws are complex and conflicting and near incomprehensible to a many employers.

So to be truly employer-friendly, the new commissioner has two choices - streamline existing regulations so that they work better and do not conflict with Federal counterparts, or engage in lax enforcement.

Lax enforcement is a default option until something really bad happens, like worker injuries that could have been prevented or docked paychecks that should never have occurred.  So while banishing the word “labor” is good symbolism, the real work is engaging in a total review of all existing  regulations and to streamline them through executive order when possible or to propose new ones when necessary.

While the focus of health care reform has now moved to the U.S. Senate, it is a good time to start thinking about what it means for New Jersey.

New Jersey is a small business state. About 95% of the state’s businesses, or 249,448 firms, employ 50 or fewer employees.  These firms employ eight out of ten working people in the state, or nearly 1.36 million people.  Most of the adult citizens who are uninsured are employed, primarily by a small business.  According to federal statistics, 54.3% of New Jersey employers with fewer than 50 employees provide health care coverage. This represents about 135,550 employers that employ 737,500 people. 

New Jersey employers have stated that the primary reason for offering coverage is to attract and retain qualified workers. Rutgers Center for State Health Policy (2004). Most employers that do not offer health insurance indicate that the cost is too high. Id.  Research indicates that even a 30% reduction in premiums would cause only about 15% of currently uninsured small employers to offer coverage. See The Commonwealth Fund, Task Force for the Future of Health Insurance (2002).

In 1992, New Jersey reformed its individual and small group insurance market. All insurance carriers (other than HMOs) are required to offer five standardized contracts on a guaranteed issued, community rated basis.  Carriers may not consider the health status or past claims experience of a group in determining premiums. The law requires carriers to limit variation in cost to a two to one ratio. Thus, the rate for the highest cost group (based on age, gender, and geography) may not be more than two times the rate for the lowest cost group of the same size.   

The number of individuals insured by these small employer plans peaked in 1999 at 937,784 but has since declined to about 884,000. Health Affairs “Community Rating and Sustainable Individual Health Insurance Markets in New Jersey” Vol.23, No.4.

New Jersey’s health care reform has done little to mitigate health care inflation. According to the N.J. Business and Industry Association Health Insurance Survey, the average cost per employee in 2008 was $7,861, nearly double the cost in 2002.  The cost of health care premiums in New Jersey rose nearly five times faster than wages this decade, according to Families USA, a Washington-based nonprofit group. Their report issued in 2008, found premiums in New Jersey rose 71 percent while earnings increased just 15 percent between 2000 and 2007.

New Jersey ranked 28th among states in the rate of growth in premiums compared with earnings.New Jersey may likely receive tens of millions of dollars in subsidies, Medicaid funds, tax credits and direct grants to cover the costs of expanded coverage, the creation of community health clinics, training of primary care providers and nurses, and other programs. In return, states must comply with substantial administration and record keeping requirements across the entire health care industry and conform its insurance laws to federal standards.

The biggest risk for New Jersey is that small employers who are already providing health care insurance to their employees will simply choose not to sponsor a health care plan knowing that their employees will still be covered by a mandated plan.   Advocates of federal health care reform have taken a big leap of faith in believing that small employers will not respond to this incentive to cut back or drop coverage entirely. They believe that the competition for talented employees will maintain the status quo. For small knowledge-intensive firms, where talent is scarce, health care benefits will be a big attraction.  But for many small employers, the skills of an uninsured workforce weighed against the increasing costs of health care may cause them to drop coverage altogether, particularly with the assurance that every employee will have access to the mandated plan.   The complexity and enormity of the health care reform will require states to develop the public and private infrastructure to implement the law.  Conceivably, every important state government agency will be impacted. While New Jersey’s insurance laws already substantially conform to federal standards, at present the state bureaucracy may be incapable of administrating federal health care funds, particularly in the urban areas that will be targeted for clinics and for wellness and prevention programs.    Moreover, even if comprehensive reform is not enacted, the trajectory of health care inflation will continue to be a drag on New Jersey economy for the indefinite future. In terms of policy, the state cannot risk creating the perverse incentive for some employers to cancel employer-sponsored coverage simply to shift the costs onto the employers who continue to provide insurance. An employer tax when the state’s economy is losing jobs is untenable.   Therefore, whatever happens in the Senate, health care reform will remain at the top of the policy agenda.  

With all of the major health care reform proposals now on the table and President Obama having now weighed in, a consensus seems to have emerged on about 90% of the outstanding issues.  However, the continuing disagreement on the remaining 10% may ironically increase costs and make matters worse, at least for the foreseeable future.

Its clear that there is basic agreement on consumer protection.   If enacted, it is likely that the law will provide a basic benefits package that will cover prevention and wellness, which many employers already offer.  Carriers will not be able to discriminate based on a pre-existing condition and will not be able to cancel policies when people get sick.  Out of pocket expenses will be capped and life time limits will be eliminated.  And for the first time, nearly every American will be required to have health insurance.

An insurance exchange will be created, thus creating a pool of consumers who are expected to leverage the group buying power.  Private carriers will sell within the exchange, which will be regulated either statewide or nationally.  It is likely that some modest form of “public” or nonprofit option will be available but limited to people who can not obtain insurance through an employer, Medicare or Medicaid.  Small business may have this option available to them as well, capped at about 5% of the overall consumer market.

People who cannot afford to buy insurance will receive a subsidy. Employers who do not offer insurance to their employees will contribute to the subsidy either directly or indirectly, with exemptions for small business.  

There is wide disagreement on how to fund the subsidies but a mixed bag of taxes will probably be approved.  Debt-spending is certain.  More importantly, however, there is little agreement on how to control health care inflation.

While universal coverage will increase demand for health care, there is no agreement on how to rationally allocate health care resources.   Government regulation of how providers get paid, and for what services, has raised the emotional issue of rationing, even though Medicare already does that.  Others say giving the insurance industry this power is no better - although that’s how HMOs already operate. 

Americans are ambivalent.  Most are covered under an employer plan.  Employers shop for the  coverage, negotiate the insurance and offer it to employees on a take-it-or-leave-it basis.  The employer subsidizes the premium 80% on average.  The employee contribution is often unnoticed through incremental deductions from a paycheck.  At the point of service, the employee pays about 10 cents for every dollar of health care that is consumed.  This, ironically, is socialized medicine and Americans understandably love it. The illusion is that employer-sponsored health care can be consumed as virtually a free resource with little or no incentive to maintain heathly lifestyles or to consume wisely.

Similarly, Medicare and Medicaid are single-payer, government health care programs.  Understandably, people love these programs too, particularly Medicare, even though tens of billions of dollars are spent on over treatment every year.  The illusion here is that as a public entitlement, health care is virtually inexhaustable.

In short, at least on some level, most Americans believe that health care is a basic public entitlement, like “free” public education, and that limitations imposed either by government or corporations is unfair, illegitimate, or both.

The consensus reform, therefore, increases and expands the health care entitlement through universal coverage but has only a modest impact on cost control, primarily through pilot programs, because there is no agreement on what additional role, if any, government or the insurance industry should play in allocating the supply of health care.  

Because this fundamental political and philosophical issue apparently cannot be resolved at this time,  it is almost certain that the nation will be in the throes of another heated debate about escalating health care costs, inflation, business and personal bankruptcies, and stagnating wages a decade from now, maybe sooner.  A more imminent crisis is certain to realign interests, with the added irony that the players may have changed places by then.  It’s conceivable that the folks who are decrying big government now may be the ones begging for a government bailout then, and that the folks who are calling for unlimited universal coverage now will be the ones calling for entitlement reform.

The greater irony may be that a decade from now, it could be the Republican party afterall that will actually complete the nationalization of  health care.�

Everyone supports health care reform as a goal.  The costs of health care are growing faster than inflation, wages and the overall economy.  The United States pays more than twice on health care than any other country but 150 million Americans remain uninsured, many of them working full or part-time jobs.

Current reform measures envision near universal coverage with private insurance companies selling coverage to employers and individuals in competition with a government-sponsored plan. Insurance is expanded to millions of uninsured at a cost of roughly $1 trillion over the next decade – mostly for subsidies to low and middle income people and expansion of the Medicaid program for the poor.

Employers, particularly small business, and their employees are greatly concerned about costs.  Nearly 177 million Americans are covered by an employer-sponsored plan.

Health care economists see promise in steps like improved management of chronic diseases, increased focus on preventive care and advances in health information technology, but the Congressional Budget Office believes that savings from these measures will not mitigate the costs of expanding health care.

Fundamental changes such as permitting the government to demand discounts from drug companies and reduce payments to inefficient hospitals have been side tracked by the given and take of negotiation. So employers with payrolls exceeding $400,000 would have to provide coverage or pay an 8% payroll tax.  Employers with payrolls between $250,000 and $400,000 a year would pay a smaller tax, and those less than $250,000 would be exempt.

But for small employers it could be cheaper to pay the 8% payroll tax rather than provide health insurance. The employers who continue to provide coverage will pick up the tab for those who don’t, until they too are driven out of the game.   

In short, the current reform proposals will ultimately shift the costs of health care onto the same workers who can’t afford it now, consumers who are struggling to pay down debt, and onto the already burdened taxpayer. Without controlling costs, health care reform will actually harm the people that it is designed to help.

Attend EANJ’s Webinar,Thursday August 20th What Employers Need to Know.

The Associated Press reports that a bipartisan group of U.S. senators is closing in on a health care compromise that omits a requirement for large employers to offer coverage to their workers. Large employers would not be subject to a penalty if they declined to offer coverage to their workers. Instead, these businesses would be required to reimburse the government for part or all of any federal subsidies designed to help lower-income employees obtain insurance on their own.

The legislation in the House includes both a penalty and a requirement for large employers to share in the cost of covering employees.

Large employers typically offer some form of health care insurance to mostly full time employees.  Breaking ranks with retail lobbyists, Wal-Mart, the biggest employer in the U.S.,  is in favor of an across-the-board employer mandate.  The big retailer claims to be tired of subsidizing other retailers that do not offer insurance and whose employees receive charity care paid for by business taxes.    Wal-Mart’s Statement on Health Care Reform.

Small employers are fretting over the possibility that they may be coerced into providing health care insurance to their employees.  They say that the recently unveiled House health care reform bill, which requires most employers to provide health care insurance or pay a payroll tax, will kill jobs. 

Under the House bill, nearly every American will be required to have health care coverage.  Employers with payrolls exceeding $400,000 would have to provide coverage or pay an 8% payroll tax.  Employers with payrolls between $250,000 and $400,000 a year would pay a smaller tax, and those less than $250,000 would be exempt.

Small employers that do not provide insurance say that it is too expensive.  For a small business in New Jeresy, the average cost per employee in 2006 was $7,561. The cost of health care premiums in the state rose nearly five times faster than wages this decade. Premiums in New Jersey rose 71%, while earnings increased just 15% between 2000 and 2007.

Thus, the employer mandate will clearly increase the costs of small business in New Jersey.  Since they mostly provide goods and services in the local economy, they can cut back on employment but not that much, because they still need employees to provide the service. They will have to raise prices and pass it onto customers.  In short, its probably going to be cheaper to pay the 8% tax than to provide health insurance.

But what about the small employers that currently provide health insurance?  They are footing the bill for the employers who do not provide insurance in the form of higher premiums.  Likewise, they will continue to subsidize the employer that chooses to pay the tax. So for them, the big unintended consequence of the mandate is to create an incentive to discontinue providing insurance and shift the burden onto employees and taxpayers. Here’s why:

Currently, employer-provided health care is completely voluntary. While 96% of employers with 50 or more employees provide health insurance, only about half of small employers provide health insurance. For about one in eight of the over one million uninsured in New Jersey, at least one person in the family works. 

Of the small employers that provide health insurance, many continue to pass the costs of higher premiums onto employees in the form of bigger deductibles and co-pays. The result is that employees are declining or dropping insurance because it is increasingly unaffordable.

Advocates of the health care mandate are taking a big leap of faith that small employers will not cut back or drop coverage entirely. They believe that the competition for talented employees and avoidance of the payroll tax will keep small employers in the health care game.  To be sure, for small knowledge-intensive firms, where talent is scarce, health care benefits will be a big attraction.  But for many small employers who rely on workers with modest skills being paid modest wages, the increasing costs of health care may cause them to sit out, or get out, of the health care business altogether and simply pay the tax, particularly with the assurance that every employee is required to get coverage elsewhere, subsidized by the government if necessary.

As small employers decide to cut or cancel coverage, the employers who continue to provide coverage will continue picking up the tab for those who do not,  just as they do now. Their premiums will continue to go up, forcing more employers to get out of the game.   

So, in the short term, it would be rational for employers to not provide health care insurance in the first place, or cancel coverage if they already provide it, and pay the 8% payroll tax.  Of course, this would simply shift the cost onto workers, consumers and taxpayers who would need to help pay for the subsidies necessary to keep individual policies affordable. In short, the health care mandate will ultimately shift the costs of health care insurance onto the same workers who can’t afford it now, consumers who are struggling to pay down debt, and onto the already burdened taxpayer.

House Democrats unveiled sweeping health care legislation that would require nearly every employer to provide health care insurance to workers or be penalized 8% of payroll.

Under the bill, employers with payrolls exceeding $400,000 would have to provide coverage or pay the 8% penalty.  Employers with payrolls between $250,000 and $400,000 a year would pay a smaller penalty, and those less than $250,000 would be exempt.

According to 2006 data, employers with between 5 and 9 workers had an average payroll of around $375,000.  About half of these firms already offer employees health insurance.

A Senate bill is expected to be introduced shortly.  According to the Wall Street Journal (July 2nd), the Senate bill is also likely to have an employer mandate, which would require employers to pay an annual fee of $750 for each full-time worker and $375 for each part-time worker if they didn’t cover at least 60% of their employees’ health insurance premiums.  The Senate bill would exempt employers with 25 or fewer employees.